Electricity Markets

Fitch Says New Denton, Texas, Cryptocurrency Load Unlikely To Impact Credit Quality

A purchase power agreement (PPA) the City of Denton, Texas, has entered into with Core Scientific to provide power to the company's anticipated digital asset mining operation is unlikely to affect the credit quality of the city’s utility revenue bonds, Fitch Ratings recently said.

The new mining operation will more than double the city utility's existing electrical load by 2023, but specific power supply acquisition requirements and terms of the PPA limit credit and financial risk to the city, the rating agency said.

Core Scientific's load for its blockchain data center is expected to be approximately 300 megawatts. Denton has agreed to purchase power on behalf of Core Scientific through the organized power market operated by the Electric Reliability Council of Texas (ERCOT).

“The PPA terms are designed to minimize electric commodity price risk to the city. The settlement arrangements and collateral agreements with Core Scientific are designed to protect the city's financial position from an unexpected closure or payment default once energy has been purchased on Core Scientific's behalf,” Fitch said.

The PPA arrangement “preserves the flexibility of the digital asset mining facility to shut down or reduce operations in the event that ERCOT energy prices are too high to allow it to operate economically,” Fitch said. It noted that Core Scientific is able to operate as a controllable load resource within ERCOT, “which provides value in that ERCOT can purchase grid reliability products from Core Scientific, and ERCOT has the ability to require the load to cease operations in an energy shortage position, which occurred during Winter Storm Uri.” Uri hit the Texas power grid in early 2021.

Core Scientific is working with Tenaska Energy Inc. on this project. Tenaska will build the high voltage interconnection and transformer equipment needed to provide the high volume of electricity to the facility. There will be no additional capital expenditures required of the city, Fitch noted. Tenaska will also provide power management services to the project.

Fitch noted Denton adopted a renewable resource plan in 2018 that sets a goal of providing the city with 100% renewable energy. The city has contracted for renewable supplies, but also owns a natural gas plant, the Denton Energy Center, which firms the intermittent production of renewable energy and acts as a cost hedge. Core Scientific has a net carbon-neutral goal that aligns with the city's plan, and the company has committed to using emissions-free power supplemented by renewable energy credits to power the Denton facility.

“Increased customer concentration introduced by the Core Scientific facility will not diminish the utility's very strong revenue defensibility assessment. Financial risk to the city is largely mitigated due to the terms of the PPA. The unexpected closure of the facility, should it occur, would not negatively impact the city's economy or utility rates, since the facility will not be a large employer,” the rating agency said.